BLOG on Income Tax Management for - AY 2022-23 & 2023-24

[Section-35D] : Amortisation of Certain Preliminary Expenses

An Indian company or a resident non-corporate assessee can claim deduction under section 35D in respect of preliminary expenses. Such expenditure may be incurred before commencement of the business or after commencement of the business in connection with extension of an undertaking or in connection with setting up a new unit.

Assessees who can claim deduction under this section are:

Indian Company, or
a person other than a company who is resident in India.

Expenditure in respect of which deduction is available

expenditure incurred before the commencement of business; or
expenditure incurred after the commencement of business in connection with the extension of existing undertaking or in connection with setting up a new unit.
Expenses qualifying for deduction:

The following expenses qualify for deduction:

Expenditure incurred in connection with:
1. preparation of a feasibility report;
2. preparation of a project report;
3. conducting market survey or any other survey necessary for the business of the assessee;
4. engineering services relating to the business of the assessee;
legal charges for drafting any agreement between the assessee and any other person relating to the setting up or conduct of the business of the assessee;
where the assessee is company, also, expenditure—
1. by way of legal charges for drafting the Memorandum and Articles of Association of the company;
2. on printing of the Memorandum and Articles of Association;
  1. by way of fees for registering the company under the provisions of the Companies Act, 1956;
  2. in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus;
such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provisions of this Act) as may be prescribed.

Amount Qualifying for Deduction:

The aggregate of the expenditure referred to in clauses (1) to (4) above shall not exceed 5% of the cost of the project in case of all assessees other than companies.

In the case of a company, it cannot exceed 5% of—

the Cost Of the Project, or
the Capital Employed in the Business of the Company,
whichever is beneficial to the company.

Cost Of Project -

It means the actual cost (or additional cost incurred after commencement of business in connection with extension or setting up an undertaking) of fixed assets, namely, land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences.

Capital Employed in the Business of a Company -

It is the aggregate of the issued share capital, amount outstanding as share premium† account, debentures and long-term borrowings, as on the last day of the previous year in which the business of the company commences (in the case of an existing company only capital, debentures and long-term borrowing issued or obtained in connection with the extension of the undertaking or the setting up of the new unit of the company, shall be considered).

Amuont of Deduction:

1/5 th. of the Qualifying Expenditure is Allowable as Deduction in each of the 5 (five) successive years beginning with the year in which the business commences, or as the case may be, the previous year in which extension of the undertaking is completed or the new unit commences production or operation.

Compulsory Audit of Accounts:

No deduction shall be admissible under this section in case of assessees other than a company or cooperative society unless the accounts of the assessee for the year or years for which the expenditure specified above is incurred have been audited by a chartered accountant and the assessee furnishes alongwith his return of income for the first year in which the deduction under this section is claimed, the report of such audit in the prescribed form i.e. Form 3B duly signed by such Chartered Accountant.